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DTTL Tax Indiaguide 2015
DTTL Tax Indiaguide 2015
in India 2015
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India Taxation and Investment 2015
Washington Treaty on Layout of Integrated Circuits, the Budapest Treaty on Deposit of Micro-
organisms and the Lisbon Treaty on Geographical Indicators.
As a member of the WTO, India has enacted the Geographical Indications of Goods (Registration
& Protection) Act (1999).
1.2 Currency
The currency is the Indian rupee (INR).
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FDI can be made through two routes: the automatic route and the approval route:
Automatic route: A foreign investor or an Indian company does not need the approval
of the government or the RBI to make an investment. The recipient (Indian company)
simply must notify the RBI of the investment and submit specified documents to the RBI
through an authorized dealer. Where there are sector-specific caps for investment,
proposals for stakes up to those caps are automatically approved, with a few exceptions.
FDI of up to 100% is permitted under the automatic route for manufacturing of medical
devices, under the pharmaceutical sector rules. FDI (including the establishment of
wholly-owned subsidiaries) is allowed under the automatic route in all sectors, except
those specifically listed as requiring government approval. The government has
established norms for indirect foreign investment in Indian companies, according to
which an investment by a foreign company through a company in India that is owned
and/or controlled by a nonresident entity would be considered a foreign investment.
Approval route: Proposed investments that do not qualify for the automatic route must
be submitted to the Foreign Investment Promotion Board (FIPB); areas where FIPB
approval is required include tea plantations, defense, up-linking of news and current
affairs television channels, print media, private security agencies, multi-brand retail
trading, brownfield pharmaceuticals, etc.
Investment in certain sectors is prohibited even under the approval route, such as those involving
lotteries, gambling and betting, the manufacturing of cigarettes, the real estate business,
construction of farm houses, atomic energy, railway operations (other than railway infrastructure),
trading in transferable development rights, chit funds and Nidhi companies.
Overseas investors (such as foreign portfolio investors (FPIs), qualified foreign investors (QFIs),
foreign venture capital investors (FVCIs), nonresident individuals (NRIs) and persons of Indian
origin (PIOs)) are permitted to invest in Indian capital markets. FPIs must register with designated
depository participants (DDPs) authorized by the Securities and Exchange Board of India (SEBI),
and FVCIs must register with the SEBI.
Indian companies are permitted to issue equity shares, fully and mandatorily convertible
debentures, fully and mandatorily convertible preference shares, warrants and partly paid equity
shares, subject to certain conditions, pricing guidelines/valuation norms and reporting
requirements.
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India Taxation and Investment 2015
Benefits under foreign trade policy
Various tax and other incentives are granted on exports of goods and services, as well as on
imports of inputs and capital goods for use in exports of goods and services. The incentives are
granted under various schemes. Some popular schemes include the following:
Export promotion of capital goods scheme;
Advance authorization scheme for import of inputs;
Drawback/rebate scheme for duty on inputs used in exports;
Focus market and focus product schemes;
Served from India scheme; and
Export oriented unit scheme.
Benefits under state industrial policy
Depending on the scale of investment and the need for economic development of specific regions
or industries, various incentives are granted to qualifying units.
These benefits generally are available for specified periods and are subject to compliance with
prescribed conditions, including employment of local people of the specified region. For example,
in Maharashtra, the following incentives are available under the Package Scheme of Incentives,
2013:
Industrial promotion subsidy, which is linked to payment of VAT/central sales tax;
Interest subsidy on term loans obtained for the acquisition of fixed assets;
Exemption from the payment of electricity duty for a specified period;
Waiver from stamp duty; and
Power tariff subsidy for specified industries (namely micro, small and medium
manufacturing enterprises) for three years for specified units.
Benefits to SEZ units
Units set up in the areas designated as SEZs are granted various tax benefits. Indirect tax benefits
include the following:
Exemption from customs duty on the import of capital goods and inputs;
Exemption from excise duty on the domestic procurement of goods;
Exemption from service tax on the procurement of input services that are wholly consumed
in SEZs;
Exemption from excise duty on the manufacture of goods in SEZs;
Exemption from central sales tax on interstate purchases of goods; and
VAT benefits on intrastate purchases (subject to the provisions of state VAT law).
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2.0 Setting up a business
2.1 Principal forms of business entity
The principal forms of doing business in India are the limited liability company (public company or
private company, or one-person company (OPC)); limited liability partnership (LLP); partnership
firm; association of persons; representative office, branch office, liaison office, project office or site
office of a foreign company; and trust. Foreign investors may adopt any recognized form of
business enterprise. The limited liability company is the most widely used form for a foreign direct
investor. Joint ventures also are popular.
The formation, management and dissolution of limited liability companies is governed by the
Companies Act, 1956, which is being phased out by the new Companies Act 2013 (the
Companies Act), which is administered by the Ministry of Corporate Affairs through the Registrar
of Companies (ROC), the Regional Director, the Company Law Board, the Official Liquidator and
National Company Law Tribunal and special courts.
Formalities for setting up a company
A foreign company can commence operations in India by incorporating a company under the
Companies Act as a subsidiary (including a wholly-owned subsidiary) or as a joint venture
company.
Private or public companies and OPCs are formed by obtaining name availability approval, and
then registering the memorandum and articles of association and prescribed forms with the ROC in
the state in which the registered office is to be located. If the documents are in order, the ROC
issues a certificate of incorporation. The filing for company formation is made in electronic form.
Before commencing business or exercising borrowing power, companies formed under the
Companies Act are required to file a declaration with the ROC, to the effect that subscription funds
have been received from every subscriber; the minimum paid-up share capital has been received;
and the registered office of the company has been verified
All directors or proposed directors must obtain a director identification number and must obtain a
digital signature certificate from the certifying authority for electronic filings.
Depending upon the nature of the business activities and the business sector, companies need to
register with the relevant sector regulators:
Financing and investing operations, etc., must register with the RBI as nonbanking
finance companies;
Asset reconstruction companies must register with the RBI;
Insurance services (life and nonlife) and insurance broking companies, etc., must
register with the Insurance Regulatory Development Authority;
Stockbrokers, sub-brokers, merchant bankers, underwriters, custodians, portfolio
managers, credit rating agencies, mutual funds, asset management companies,
alternate investment funds, investment advisors, research analysts, share transfer
agents etc., must register with the SEBI; and
Pension funds must register with Pension Fund Regulatory and Development Authority,
etc.
Forms of entity
Companies are broadly classified as private limited companies, public limited companies and
OPCs. Companies may have limited or unlimited liability. A limited liability company can be limited
by shares (the liability of a member is limited up to the amount unpaid on shares held) or by
guarantee (the liability of a member is limited up to the amount for which a guarantee is given).
Companies limited by shares are a common form of business entity. Public limited companies can
be closely held, and unlisted or listed on a stock exchange.
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An OPC is a company having only one person as its member. A natural person who is an Indian
citizen and resident in India is eligible to incorporate an OPC. The memorandum of an OPC must
indicate the name of the person who would become the member in the event of death or incapacity
of the sole member.
A private company is a company that, by virtue of its articles of association, prohibits any invitation
to the public to subscribe for any of its securities; restricts the number of members to 200
(excluding employees and former employees); and restricts the right to transfer its shares.
A public company is a company that is not a private company. A public company may offer its
shares to the general public, and no limit is placed on the number of members. A private company
that is a subsidiary of a company that is not a private company also is considered a public
company
A section 8 company (i.e. a section 25 company under the Companies Act 1956) is a company
formed for the purpose of promoting commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of the environment or other useful objective that intends to
apply its profits (if any) or other income in promoting its objects. A section 8 company is not
permitted to pay dividends to its members. It must be licensed by the government (this power is
delegated to the ROC) and can be incorporated as a private or public company with liability limited
by shares or by guarantee.
Requirements for public and private company
Capital: A public limited company must have a minimum paid-up capital of INR 500,000; a private
limited company must have INR 100,000.
Types of share capital: There are two types of shares under the Company Law: preference
shares and equity shares. Preference shares carry preferential rights in respect of dividends at a
fixed amount or at a fixed rate before holders of the equity shares can be paid, and carry
preferential rights with respect to the repayment of capital on winding up or otherwise. In other
words, preference share capital has priority in repayment of both dividends and capital. The tenure
of preference shares generally is a maximum of 20 years. Companies engaged in infrastructural
projects may issue preference shares for a period exceeding 20 years, but not exceeding 30 years.
Equity shares are shares that are not preference shares. Equity shares can be shares with voting
rights or shares with differential rights as to dividends, voting, etc. A company may issue equity
shares with differential rights for up to 26% of the total post-issue paid up equity share capital if it has
distributable profits in the preceding three years and has complied with other conditions. Listed public
companies cannot issue shares in any manner that may confer on any person superior rights as to
voting or dividends vis--vis the rights on equity shares that are already listed.
Securities can be held in electronic (dematerialized) form through the depository mode. In the case
of a public/rights issue of securities of listed companies, the company must give investors an
option to receive the securities in physical or electronic form. For shares held in dematerialized
form, no stamp duty is payable on a transfer of the shares. Shares of an unlisted public company
or private company also may be held in dematerialized form.
Members: An individual or legal entity, whether Indian or foreign, may be a member of a company.
A public company must have at least seven members; the minimum number of members in a
private company is two and the maximum is 200 (excluding employees and former employees);
and an OPC may have only one person as a member.
Management: Listed companies and public limited companies with paid-up capital of INR 100
million or more must appoint (i) a managing director or a full-time director or manager or Chief
Executive Officer (CEO); (ii) a Chief Financial Officer (CFO); and (iii) a Company Secretary (CS),
as its full-time key managerial personnel (KMP). The maximum term of a managing
director/manager of any company is five years, which may be renewed. A KMP may not hold office
in more than one company, except in a subsidiary company.
Board of directors: Only individuals may be appointed as directors. A public limited company
must have at least three directors; private company must have at least two directors; and an OPC
must have at least one director. Companies can have a maximum of 15 directors and may
increase this number with the approval of the members by special resolution.
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Every company must have at least one resident director who has stayed in India for a total period
of at least 182 days in the previous calendar year.
Every listed company or other public company having paid-up share capital of at least INR 1 billion
or turnover of INR 3 billion is required to appoint a female director.
At least one-third of the total number of directors of a listed company must be independent
directors (IDs). Public companies having paid-up share capital of at least INR 100 million; turnover
of INR 1 billion; or aggregate outstanding loans, debentures and deposits exceeding INR 500
million must have at least two IDs.
Directors are elected by a simple majority, or by methods provided in the articles of association.
Remuneration of the directors of a company is subject to ceilings and requires approval of the
central government if the company has insufficient profits or has losses, subject to certain
conditions.
Board meetings may be held anywhere. A minimum of four board meeting must be held every
year, and the time gap between two consecutive meetings cannot exceed 120 days. Barring
certain exceptions, the board has full powers and may delegate its powers to a committee of the
board.
Board committees: Listed companies and public companies having paid-up capital of at least INR
100 million; turnover of INR 1 billion; or aggregate loans, borrowings, debentures or deposits of
INR 500 million must form an audit committee, consisting of a minimum of three directors, a
majority of which must be IDs. Such companies also must form a nomination and remuneration
committee, consisting of a minimum of three or more nonexecutive directors, at least half of which
must be IDs.
General meeting: An annual general meeting (AGM) of members must be held at least once each
year (except for an OPC), and the time gap between two AGMs should not exceed 15 months
(extendable up to three months with approval of the ROC, except for the first AGM). The first AGM
must be held within nine months from the date of closing of the first financial year of the company
(the first period ending on 31 March); in such a case, it is not necessary to hold the first AGM in the
year of incorporation. Subsequent AGMs must be held within six months from the date of closing of
each financial year. Each AGM must be held during business hours (i.e. between 9 a.m. and 6
p.m. on any day that is not a national holiday) and must be held at either the registered office of
the company or at some other place within the city, town or village in which the registered office of
the company is situated. Among the business to be addressed at an AGM is approval by the
members of the audited financial statements for the financial year, declaration of dividends and
appointment of an auditor and directors.
An extraordinary general meeting can be called by the board of directors at the request of holders
of 10% of the paid-up share capital.
A quorum is established in the case of a private company when a minimum of two members are
present personally at a meeting. In the case of a public company, the minimum requirements are
as follows (a) five members personally present, if the number of members is no more than 1,000;
(b) 15 members personally present, if the number of members is more than 1,000 and up to 5,000;
and (c) 30 members personally present if the number of members exceeds 5,000. If a quorum is
not present within half an hour of the start of the meeting, then, subject to the provisions of the
articles of association, the meeting is adjourned until the following week, at which time all members
present, regardless of number, constitute a quorum.
There are two kinds of resolutions that may be passed at a meeting: ordinary and special. An
ordinary resolution may be passed by a simple majority of members present in person or
represented by proxy. Special resolutions require at least a 75% vote and include proposals for
liquidation, transfer of the companys offices from one state to another, buyback of securities,
amendment of the articles of association, increases in intercorporate investments/loans, etc.
Unless a poll is demanded by the chairman of the general meeting, by the specified number of
members or by the members holding specified shares, the voting at a general meeting is done
through a show of hands or is carried out electronically. However, listed companies and companies
having at least 1,000 members cannot pass a resolution by a show of hands and must provide their
members the ability to exercise their right to vote at general meetings by electronic means. Each
member has one vote. In the case of a poll, voting rights of a member are in proportion to his/her
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India Taxation and Investment 2015
share of the paid-up equity capital. Preference shareholders have the right to vote only on matters
that directly affect the rights attached to preference shares. Preference shareholders have the same
rights to vote as equity shareholders if a dividend has remained unpaid for a specified period.
Board meetings and general meetings also may be held through video conferencing, subject to
compliance with requirements specified by the Ministry of Corporate Affairs.
Dividends: Dividends must be paid in cash. Dividend must be deposited into a separate bank
account and paid within the stipulated time. Dividends for a financial year can be paid out of: (a)
profits of that year, after providing for depreciation; (b) profits of any previous financial year(s)
arrived at after accounting for depreciation and remaining undistributed profits; or (c) both. No
dividend may be declared unless carried-over losses and depreciation not provided for in earlier
years has been set off against the companys profits for the current year.
In the case of losses in the current financial year, any interim dividends declared may not exceed
the average of the rates at which dividends were declared in the three years immediately
preceding the current year.
In the case of inadequate profits or losses, dividends can be declared out of free reserves, subject
to fulfillment of certain conditions.
Corporate social responsibility (CSR):
Domestic companies and foreign companies having a branch office or project office in
India are required to form a CSR board committee if they have a net worth of INR 5 billion
or more; turnover of INR 10 billion or more; or a net profit of INR 50 million or more during
any of the three preceding financial years.
The CSR committee must formulate and recommend a CSR policy, recommend
expenditure amounts and monitor the CSR policy from time to time.
The Companies Act sets forth the list of activities for which CSR activities can be
undertaken by companies, some of which include promoting health care (including
preventive health), promoting education, promoting empowerment of women, ensuring
environmental sustainability, protecting national heritage, contributing to the prime
minister's national relief fund, promoting rural development projects, promoting slum area
development, etc.
A companys board of directors is required to ensure that the company spends, in a
financial year, at least 2% of its average net profits during the three immediately preceding
financial years on CSR expenditure.
The boards reporting requirements for a company include an annual report on CSR.
Limited Liability Partnership (LLP)
An LLP is a body corporate that is a separate legal entity distinct from its partners. An LLP is
required to be registered under the Limited Liability Partnership Act, 2008 (LLP Act) with the ROC.
Any individual or body corporate (including an LLP, a foreign LLP and an Indian or foreign
company) can be a partner in an LLP. An LLP must have at least two partners, and there is no
upper limit on maximum number of partners. An LLP also must have at least two designated
partners who are individuals, and at least one of them must be resident in India (for bodies
corporate, an individual who is a partner or nominee may act as a designated partner). Designated
partners are liable for compliance under the LLP Act, and in the event of noncompliance they will
be liable for penalties. Every designated partner must obtain a Directors Identification Number
(DIN).
The mutual rights and duties of partners of an LLP inter se, and those between the LLP and its
partners, are governed by an LLP agreement. A partner may transfer the rights to share in the
profits and losses of the LLP, either wholly or in part. The financial year of an LLP must end on 31
March.
Among other things, an LLP has the power to sue and may be sued. An LLP can acquire, own,
hold, develop or dispose of movable or immovable property. The provisions of the Indian
Partnership Act, 1932 do not apply to LLPs. The central government has the power to announce
that any of the provisions of the Companies Act may apply to LLPs.
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A foreign LLP can establish a place of business in India and carry on its business by registering
under the LLP Act. FDI can be brought into an LLP under the government approval route, subject
to compliance with requirements stated in the FDI policy.
Branch of a foreign corporation, liaison office, project office
In addition to establishing a wholly-owned subsidiary (or setting up a joint venture or LLP in India),
a foreign company may establish its presence in India by setting up a liaison office/representative
office (LO/RO), project office/site office (PO/SO) or branch office (BO). However, a BO of a foreign
company attracts a higher rate of tax than a subsidiary or joint venture company.
A LO (also known as representative office) acts as a communication channel between the head
office abroad and parties in India. A LO is not allowed to undertake any business in India and
cannot earn income in India. The expenses of a liaison office must be met out of inward
remittances from the head office. A LO may be permitted to promote export from or import to India,
promote technical and financial collaboration between a parent/group company and companies in
India, represent the parent/group company in India, etc.
Foreign companies engaged in manufacturing and trading may establish a BO in India for the
following activities:
Export/import of goods (retail trading activity of any kind is strictly prohibited);
Rendering of professional or consulting services;
Carrying out research work in areas in which the parent company is engaged;
Promoting technical or financial collaboration between Indian companies and the head office
or an overseas group company;
Representing the head office in India and acting as a buying/selling agent in India;
Rendering services in information technology and development of software in India;
Rendering technical support for products supplied by the parent/group companies; and
Carrying on a foreign airline/shipping business.
The eligibility criteria for setting up a BO or LO center on the track record and net worth of the
foreign head office. For a BO, the head office must have a profit-making track record in its home
country during the preceding five financial years (three years for a liaison office). The net worth of
the foreign head office cannot be less than USD 100,000 or its equivalent to establish a BO (USD
50,000 or its equivalent to establish a LO). Net worth for these purposes is the paid-up share
capital (+) free reserves (-) intangible assets (computed as per the latest audited balance sheet or
account statement certified by a certified public accountant or registered accounts practitioner).
RBI approval, followed by registration with the ROC, is required to set up a BO of a foreign
company, a RO or a LO. Financial statements, annual activity certificates, etc. must be submitted
annually to the ROC/RBI.
Foreign companies planning to carry out specific projects in India may establish a temporary
PO/SO for the purpose of carrying out activities relating to the project. RBI has granted general
permission to foreign companies to establish project offices in India, provided they have secured a
contract from an Indian company to execute the project and other requirements are met. If the
foreign company cannot meet the requirements, it must seek approval from the RBI before setting
up. POs may not undertake or carry on any activities other than those relating to and incidental to
execution of the project. Once the project is completed and tax liabilities are met, the PO may remit
any project surplus outside India.
BOs, LOs and POs established in India by foreign entities are required to make certain disclosures
with the RBI/Director General of Police/ROC upon setup, the occurrence of specified events and
annually.
As per the Companies Act 2013, an overseas company/overseas body corporate that has a place of
business in India, whether by itself or through an agent, physically or through an electronic mode,
and conducts any business activity in India in any other manner is required to register with ROC as
a foreign company.
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Joint ventures
Joint venture companies commonly are used for investment in India.
Business trusts
Real estate investment trust (REIT) and infrastructure investment trust (Invit) taxation regimes
have been introduced to allow these structures (referred to as business trusts) to be set up in
accordance with SEBI regulations. The investment model for REITs and Invits allows these
business trusts to raise capital through an issue of listed units and to raise debt from resident and
nonresident investors. Business trusts will be able to acquire a controlling or other specific interest
in an Indian special purpose vehicle (SPV) from the sponsor.
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The Competition Act, 2002 prohibits anti-competitive agreements, including the formation of cartels
and the sharing of territories, restrictions of production and supply, collusive bidding and bid rigging
and predatory pricing. The following practices are considered objectionable if they lead to a
restriction of competition: tie-in arrangements that require the purchase of some goods as a
condition of another purchase; exclusive supply or distribution agreements; refusal to deal with
certain persons or classes of persons; and resale price maintenance.
The Act prohibits the abuse of a dominant position, i.e. a position of strength enjoyed by an
enterprise in the relevant market in India that enables the enterprise to operate independently of
competitive forces prevailing in the relevant market, to affect its competitors or consumers or to
affect the relevant market in its favor.
The acquisition of control/shares/voting rights/assets of an enterprise, a merger, demerger or an
amalgamation, etc., that exceeds a specified threshold of assets/turnover (in and outside India)
must be approved by the Competition Commission unless an exemption applies. The Commission
functions as the market regulator to prevent and regulate anticompetitive practices.
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3.0 Business taxation
3.1 Overview
Authority to levy taxes in India is divided between the central and the state governments. The
central government levies direct taxes, such as the corporate income tax (including minimum
alternate tax), capital gains tax and dividend distribution tax (DDT); it also levies indirect taxes,
such as central sales tax (CST), securities transaction tax (STT), commodities transaction tax
(CTT), customs duty, excise duties and service tax. Transaction taxes are set to witness a major
change as India works toward implementing a goods and services tax (GST) throughout the
country. Taxes levied at the state level include value added tax (VAT), profession tax and real
estate taxes.
Tax incentives focus mainly on establishing new industries, encouraging investment in
undeveloped areas, infrastructure and promoting exports. Export and other foreign exchange
earnings previously were favored with income tax incentives, but these generally have been
phased out, except for predominantly export-oriented units set up in SEZs. The Special Economic
Zones Act (2005) grants fiscal concessions for both SEZ developers and units in the SEZs and
provides for a legislative framework for establishing offshore banking units and international
financial service centers.
Specific taxation regimes for providing certainty in taxation for two new categories of investment
vehiclesREITs and Invits (business trusts) have been introduced.
Separate divisions of the Ministry of Finance administer various national taxes. The Central Board
of Direct Taxes (CBDT) is responsible for the administration of the direct taxes.
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India Quick Tax Facts for Companies
Dividend distribution tax 15%, plus the surcharge and cess
Tax on distribution of income through buy- 20%, plus the surcharge and cess
back of shares
Participation exemption No, except for DDT in some cases
Loss relief
Carryforward Eight years
Carryback No
Double taxation relief Yes
Tax consolidation No
Transfer pricing rules Yes
Thin capitalization rules No
Controlled foreign company rules No
Tax year 1 April31 March
Advance payment of tax Yes
Return due date for corporations 30 September/30 November (where a
transfer pricing report is to be furnished)
Withholding tax
Dividends No
Interest 10% (resident); 5%/20%/30%/40%
(nonresident), plus the surcharge and cess
Royalties and fees for technical 10%, plus the surcharge and cess
services
Branch remittance tax No
Foreign contractors tax 30%/40%, plus the surcharge and cess
Purchase of immovable property 1%, plus the surcharge and cess
Capital tax No
Social security contributions 12% of wages
Real estate tax Varies
Securities transaction tax Varies
Stamp duty Varies
Commodities transaction tax 0.01%
Customs duty 28.85%, including additional duties and
cess (basic customs duty is 10%)
Central sales tax 2%
Service tax 14%
Central excise duty 12.36%
VAT 1%/5%/12.5%-15% (rates may differ based
on the nature of the goods and also may
differ from one Indian state to another)
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3.2 Residence
A company is considered resident in India if it is incorporated in India or if its place of effective
management, in that year, is in India.
A partnership firm, LLP or other nonindividual entity is considered resident in India if any part of the
control and management of its affairs takes place in India.
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profits and gains from the operations are deemed to be 7.5% and 5%, respectively, of amounts
specified in the Income Tax Act.
Partnership firms and LLPs are taxed at 30% (plus the surcharge and cess). The effective tax rate
for partnership firms and LLPs is 30.9% (where income is less than or equal to INR 10 million), or
34.608% (where income exceeds INR 10 million). Interest, salary, bonuses, commissions or
remuneration to any partner is allowed as a deduction, subject to the fulfilment of certain
conditions.
Special tax regimes apply to business trusts and their unitholders, including the following rules:
Dividends distributed by an SPV are subject to DDT, but are exempt in the hands of the
business trust and when distributed to its unitholders.
Interest income received by a business trust from an SPV is not taxable at the level of the
business trust (pass through treatment). However, when the business trust distributes the
income to its unitholders, it must withhold tax on the interest component of the income
distribution at 10% when distributed to resident unitholders, and at 5% when distributed to
nonresident unitholders.
A business trust may enjoy the benefit of a reduced withholding tax rate of 5% on interest
on external commercial borrowings.
Capital gains arising on the disposal of assets of the business trust are taxable in the hands
of the business trust, and exempt when distributed to unitholders.
Other income of the trust generally is taxable at the maximum marginal rate for companies.
Minimum alternate tax
A minimum alternate tax (MAT) is imposed at 18.5% (plus applicable surcharge and cess) on the
adjusted book profits of corporations (including units in an SEZ and developers of SEZs) whose
tax liability is less than 18.5% of their book profits. As from 1 April 2015, MAT does not apply to
certain income of foreign companies, namely, capital gains on transactions involving securities,
certain specified interest, royalties and fees for technical services. MAT also is not applicable on
gains arising in the hands of the sponsor on a transfer of shares of a special purpose vehicle to a
business trust in exchange for units of the trust, or on the share of income earned from an
association of persons/body of individuals. (The applicability of MAT to foreign companies prior to
1 April 2015 is uncertain.) Where the income tax payable on the total income by a company is less
than 18.5% of its book profits, the book profits are deemed to be the total income of the company,
on which tax is payable at a rate of 18.5%, further increased by the applicable surcharge and cess
for both domestic and foreign companies. Thus, the effective MAT rate for a domestic company is
19.06% (where total income is less than or equal to INR 10 million), 20.39% (where total income
exceeds INR 10 million but is less than 100 million) or 21.34% (where total income exceeds INR
100 million). For nonresident companies, if MAT applies, the effective rate would be 19.06%
(where total income is less than or equal to INR 10 million), 19.44% (where total income exceeds
INR 10 million but is less than 100 million) or 20.01% (where total income exceeds INR 100
million). Tax paid under the MAT provisions may be carried forward for set off against income tax
payable in the next 10 years, subject to certain conditions.
MAT is not payable on profits of a sick industrial company, starting from the year in which the
company becomes a sick industrial company and ending in the year during which its entire net
worth becomes equal to or exceeds the accumulated losses.
Alternate minimum tax
An alternate minimum tax (AMT) is imposed on any person (including an LLP) other than a
corporation on adjusted total income, at a rate of 18.5%, further increased by the applicable
surcharge and cess. From 1 April 2014, AMT also is imposed on a person eligible for investment-
linked incentives. Tax paid under the AMT provisions may be carried forward for set off against
income tax payable in the next 10 years, subject to certain conditions. AMT is not applicable to
individuals, associations of persons and bodies of individuals if their adjusted total income does not
exceed INR 2 million.
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Dividend distribution tax and tax on distribution of income through buyback of
shares
Dividends paid by a resident corporation are exempt from tax in the hands of the recipient, but the
resident corporation must pay DDT at a rate of 15%, plus the 12% surcharge (increased from 10%
as from 1 April 2015) and the 3% cess, on dividends declared, distributed or paid. From 1 October
2014, DDT payable must be grossed up and calculated as 15% of the aggregate dividend
declared, distributed or paid, including the DDT. The effective rate is 20.3576% (increased from
19.9941% as from 1 April 2015), including the surcharge and cess. The DDT is nondeductible by
the payer, but an ultimate Indian recipient company can offset the dividends received from an
Indian subsidiary against dividends distributed, in computing the DDT tax, if certain conditions are
satisfied. Dividends paid to the New Pension Scheme Trust are exempt from DDT. The scope of
DDT has been broadened by making developers of SEZs and units in SEZs liable to pay DDT.
The Income-tax Act that provides that an unlisted domestic company is liable to pay additional tax
of 20% on any income distributed to a shareholder on account of a buy-back of shares. The
distributed income means the consideration paid by the company on the buy-back of shares,
reduced by the amount received by the company on account of the issue of the shares. The
shareholders will not be charged for any income arising from the buy-back sale of the shares to the
company.
Taxable income defined
The law divides taxable income into various categories or heads of income. The heads of income
relevant to companies are:
Business or professional income;
Capital gains;
Income from house property; and
Other income.
A companys taxable income generally is determined by aggregating the income from all of the
heads.
Business or professional income
The computation of business income normally is based on the profits shown in the financial
statements, after adjusting for exempt income, nondeductible expenditure, special deductions and
unabsorbed losses and depreciation. The central government has issued certain standards for
computation of income and disclosures relating to particular taxpayers or classes of income.
Dividends paid by a domestic company are exempt from tax in the hands of the recipient if DDT
has been paid by the distributing company, but dividends on which DDT has not been paid are
taxed as income in the hands of the recipient at the normal rates (unless otherwise provided for in
an applicable tax treaty).
Deductions
Various deductions are taken into account in computing taxable income and each head of income
has its own special rules. Allowable deductions include wages and salaries, reasonable bonuses
and commissions, rent, repairs, insurance, royalty payments, interest, lease payments, certain
taxes (sales, municipal, road, property and expenditure taxes and customs duties), depreciation,
expenditure for materials, expenditure for scientific research and contributions to scientific
research associations and professional fees for tax services.
Specific deductions are allowed as follows:
A 100% deduction is allowed for interest payments on funds borrowed for business
purposes. However, if the funds are borrowed for the acquisition of an asset for the
expansion of an existing business or profession, interest paid for any period beginning from
the date on which the funds were borrowed for the acquisition of the asset up to the date
the asset was first put into use is not allowable as a deduction; instead, it must be
capitalized with the cost of the asset and is eligible for depreciation.
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Capital and revenue expenditure may be deducted for research conducted in-house (this
can rise to 200%) and for payments made for scientific research to specified companies or
organizations or payments to a national government laboratory, certain educational
institutions and certain approved research programs (this can rise to 200%).
Investment-linked incentives (a 100% or 150% deduction for capital expenditure other than
expenditure incurred on the acquisition of land, goodwill or financial instruments) are
available for specified activities (e.g. setting up and operating certain cold chain facilities or
warehousing facilities; laying and operating cross-country natural gas or crude or petroleum
oil pipeline networks for distribution, including storage facilities that are an integral part of
such networks; investing in housing projects under an affordable housing scheme; and
operating a hospital with 100 beds).
Incentives involving a deduction of 100% of profits for a specified period are available,
subject to certain conditions, for certain business activities (e.g. those relating to generation
or distribution of power; development of a SEZ; manufacture or production of eligible
articles; and collection and processing or treatment of biodegradable waste, among others).
A company engaged in the manufacture of goods in a factory and that employs new regular
workers may qualify for a deduction of 30% of additional wages paid to new regular workers
in the year of employment and in the following two years.
An investment allowance is available in the form of a deduction of 15% of the cost of new
plant or machinery to a company engaged in a manufacturing business. A deduction is
available if the aggregate cost of plant or machinery acquired and installed from 1 April
2013 to 31 March 2015 exceeds INR 1 billion; a similar deduction is available from 1 April
2014 up to 31 March 2017 if the cost of plant or machinery acquired and installed in a year
exceeds INR 250 million. The investment allowance is in addition to the deduction of the
normal depreciation allowance in respect of the cost of such assets.
Interest, royalties and fees for technical services paid outside India to overseas affiliates or
in India to nonresidents may be deducted, provided tax is withheld.
Payments to employees under voluntary retirement schemes may be deducted over five
years. To encourage companies to employ additional workers, an amount equal to 30% of
additional wages paid to new workers is allowed as a deduction for three years, subject to
certain conditions.
Securities transaction tax paid may be deducted.
Business losses may offset income (see below).
Indian tax law does not permit companies to take a deduction for a general bad debt reserve,
although specific bad debts may be deducted when written off. Expenses incurred for raising share
capital are not deductible, as the expenditure is considered capital in nature. No deduction is
allowed for expenditure incurred on income that is not taxable, or for payments incurred for
purposes that are an offense or prohibited by law.
Amounts payable to nonresidents and subject to withholding are not deductible if the withholding
tax is not deposited before the due date for filing the return. Expenses payable to a resident are
disallowed to the extent of 30% of such expenses if the relevant withholding tax is not deposited
before the due date for filing the return. Expenses subsequently will be allowed as a deduction in
the year when withholding tax is deposited.
Certain items are deductible only when actually paid, including taxes, duties, cess, the employers
contribution toward social security benefits for employees, certain interest payable to banks and
financial institutions and leave encashment. No deduction is allowed for income taxes or interest
thereon.
No deduction is allowed for expenses incurred for corporate social responsibility, except in certain
cases. Amounts contributed to a charitable organization are deductible to the extent of 50% of the
contribution, or 100% of the contribution if the company has positive taxable income.
Indian branches of foreign corporations may claim only limited tax deductions for general
administrative expenses incurred by the foreign head office. These may not exceed 5% of annual
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income or the actual payment of head office expenditure attributable to the Indian business during
the year (unless otherwise provided for in an applicable tax treaty), whichever is lower.
Depreciation
Asset depreciation usually is calculated according to the declining-balance method (except for
assets of an undertaking engaged in the generation or generation and distribution of power, for
which the straight-line method is optional). The depreciable base is based on actual cost, i.e. the
purchase price plus capital additions, including certain installation expenses. If an asset is sold,
discarded, demolished or destroyed, depreciation expense is reduced to the extent of the amount
realized upon the sale, if any.
The depreciation rate on general plant and machinery is 15%. Subject to certain conditions,
additional depreciation on new plant and machinery acquired on or after 1 April 2005 may be
available at 20% of actual cost. Factory buildings may be depreciated at 10%; furniture and fittings
at 10%; computers and software at 60%; specified energy-saving devices at 80%; and specified
environmental protection equipment at 100%. Depreciation is allowed at 100% for buildings
acquired after 1 September 2002 for the installation of a plant or machinery, but only for water
supply projects or water treatment systems put to use as infrastructure facilities. Amortization is
allowed at 25% on certain types of intangible assets such as know-how, patents, copyrights,
trademarks, licenses, franchises or any business or commercial rights of a similar nature. Goodwill
acquired in the course of an amalgamation also is treated as an intangible asset eligible for
amortization, based on a ruling of the Indian Supreme Court.
Depreciation is calculated at 50% of the normal rates if an asset is used for less than 180 days in
the first year. Depreciation allowances on buildings, machinery, factories and factory equipment or
furniture are available on assets partially owned by a taxpayer. Unabsorbed depreciation may be
carried forward indefinitely.
Capital assets purchased for scientific research may be written off in the year the expenditure is
incurred. Preliminary outlays for project or feasibility reports (limited to 5% of the cost of the project
or capital employed) may be amortized over five years from the commencement of business.
For succession in businesses and amalgamation of companies, depreciation is allowed to the
predecessor and the successor, or the amalgamating and amalgamated company, based on the
number of days each used the assets.
If an asset has been sold and leased back, the actual cost for computing the depreciation
allowance is the written-down value to the seller at the time of transfer.
Losses
Losses arising from business operations in an assessment year may be set off against income
from any source in that year. A business loss may be carried forward and set off against future
business profits in the next eight assessment years. Closely held companies must satisfy a 51%
continuity of ownership test to qualify for a business loss carryforward.
Losses may be carried forward only if the tax return is filed by the due date. However, unabsorbed
depreciation can be carried forward indefinitely, even if the tax return is not filed by the due date.
See under 3.4, below, for the treatment of capital losses.
Capital gains
See under 3.4, below.
Income from house property
This category applies to income from the letting out of property that is derived by a company in the
business of letting out property or by a company that holds the property as an investment. The
computation of income from house property normally is based on the annual value of the property,
as reduced by a deduction equal to 30% of the annual value and a deduction for interest payable
on capital borrowed in respect of the property. The annual value is the sum for which the property
might reasonably be expected to be let out from year to year, and is reduced by taxes levied by
any local authority in respect of the property.
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Income from other sources
Other income is the residuary category under which income is taxable if not chargeable under
any other specified head of income. The expenses wholly and exclusively incurred for the purpose
of earning the income are deductible.
Dividends, interest and income from assets let on hire are taxable under this head if not
chargeable as business income. Income from shares of a closely held company received by a firm
or closely held company without consideration, or for consideration lower than fair market value, is
taxable under this head. Advances received for transfer of a capital asset subsequently forfeited
are taxable. Consideration received by a closely held company (other than a venture capital
undertaking or company or other specified company) for an issue of shares in excess of the fair
market value of the shares also is taxable under this head.
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Canada Kazakhstan Philippines Turkey
China Kenya Poland Turkmenistan
Colombia Korea (ROK) Portugal Uganda
Cyprus Kuwait Qatar Ukraine
Czech Republic Kyrgyzstan Romania United Arab Emirates
Denmark Latvia Russia United Kingdom
Egypt Libya Saudi Arabia United States
Estonia Lithuania Serbia and Uruguay
Montenegro*
Ethiopia Luxembourg Singapore Uzbekistan
Faroe Islands Malaysia Slovak Republic Vietnam
Fiji Malta Slovenia Zambia
Finland Mauritius
* Although Serbia and Montenegro ceased to exist in 2006, the treaty concluded between Serbia
and Montenegro and India remains applicable in relations between Serbia and India. Montenegro
has declared that it will honor all tax treaties that were concluded by Serbia and Montenegro, but
India has not yet confirmed application of the treaty.
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transactions with associated enterprises, along with the methods used for benchmarking. The
primary onus is on the taxpayer to establish that the price charged or paid in the course of
international transactions complies with the arms length principle. The regulations prescribe
detailed documentation requirements, stringent penalty provisions and a procedure for audit of
transfer pricing cases by specialized revenue officers known as transfer pricing officers. Where the
application of the arms length price would reduce the income chargeable to tax in India or
increase the loss, no adjustment is made to the income or loss. If an adjustment is made to a
company enjoying a tax holiday, the benefit of the holiday will be denied in relation to the
adjustment made.
Transfer pricing audits have been more aggressive in recent times, leading to controversy and
litigation. Several measures, such as the introduction of a dispute resolution panel, the advance
pricing agreement (APA) with the tax authorities, additional resources to handle transfer pricing
audits and an extension of the time to complete the audit have been introduced to reduce the
burden of an audit on the tax officers and make the audit process more reasonable so that the
results are evaluated according to the facts and circumstances of each taxpayer. As these have
not been resulting in commensurate gain to revenue, safe harbor rules have been introduced to
curb litigation and provide certainty to taxpayers. The safe harbor rules apply in certain specified
sectors and provide for automatic acceptance of taxpayers transfer price if the price is above
specified amounts and the taxpayer submits an application in the prescribed form. A validly
exercised safe harbor option may remain in force for up to five years, provided certain conditions
are met.
A taxpayer may enter into an APA with the CBDT to determine an arms length price or the manner
of determination of an arms length price. An APA is valid for five years and is legally binding on
the taxpayer and on the tax authorities in respect of the international transaction for which it has
been entered into, except where there is a change in law having a bearing on the APA. From 1
October 2014, an APA can be rolled back to cover up to four past years prior to the first year
otherwise covered under the APA.
Thin capitalization
India does not have thin capitalization rules.
Controlled foreign companies
India does not have CFC rules, but these have been proposed.
General anti-avoidance rule
India currently does not have a GAAR. The GAAR provisions, which were to be implemented as
from 1 April 2015, have been deferred and will apply to investments made after 1 April 2017. The
GAAR will empower the tax authorities to declare an arrangement an impermissible avoidance
arrangement if it was entered into with the main purpose of obtaining a tax benefit, and (a) it
creates rights or obligations that normally would not be created between persons dealing at arms
length; (b) it results, directly or indirectly, in the misuse or abuse of the Income Tax Act; (c) it lacks
commercial substance or is deemed to lack commercial substance; and (d) it is carried out in a
manner that would not be used for bona fide purposes. Once the GAAR is invoked, tax treaty
benefits also may be denied for the arrangement.
3.7 Administration
Tax year
The tax year in India, known as the previous year (fiscal year), is the year beginning 1 April and
ending 31 March. Income tax is levied for a previous year at the rates prescribed for that year.
Income of a fiscal year is assessed to tax in the next fiscal year (i.e. the assessment year).
Filing and payment
Taxes on income of an assessment year usually are paid in installments by way of advance tax. A
company must make a prepayment of its income tax liabilities by 15 June (15% of the total tax
payable), 15 September (45%), 15 December (75%) and 15 March (100%). Any overpaid amount
is refunded after submission of the final tax return.
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A company must file a final tax return, reporting income of the previous year, by 30 September
immediately following the end of the fiscal year, stating income, expenses, taxes paid and taxes
due for the preceding tax year. A noncorporate taxpayer that is required to have its accounts
audited also must file a return by 30 September. The due date for filing returns and transfer pricing
accountants reports is extended to 30 November for taxpayers with international transactions
during the year. All other taxpayers must submit a return by 31 July. Guidance is issued annually
for the selection of tax returns for scrutiny by the tax authorities. If the tax authorities can prove
concealment of income, a 100%-300% penalty may be levied on the tax evaded.
All taxpayers are required to apply for a permanent account number (PAN) for purposes of
identification. The PAN must be quoted on all tax returns and correspondence with the tax
authorities and on all documents relating to certain transactions. Every recipient (whether resident
or nonresident) of India-source income that is subject to withholding tax must furnish a PAN to the
Indian payer before payment is made. Otherwise, tax must be withheld at a higher rate,
irrespective of the rate provided under an applicable tax treaty.
Consolidated returns
No provision is made for group taxation or group treatment; each entity is taxed separately.
Statute of limitations
If a tax officer believes that income has escaped assessment, proceedings can be reopened within
seven years from the end of the financial year in which the income escaping audit exceeds INR 0.1
million. However, the proceedings can be reopened only within five years if the tax officer has
conducted an audit and assessed income and the taxpayer has submitted a return and fully
disclosed all material facts necessary for assessment. Further, the proceedings can be reopened
within 17 years from the end of the financial year if the income in relation to any asset (including a
financial interest in any entity) located outside India has escaped assessment. There is no
limitation period for the authorities to collect tax once an audit is completed and a demand for tax is
made.
Tax authorities
The CBDT is the body that is responsible for providing essential input for policy and planning of
direct taxes in India and for administration of direct tax laws through subordinate income tax
authorities.
Rulings
The Authority for Advance Rulings (AAR) issues rulings on the tax consequences of transactions
or proposed transactions with nonresidents. From 1 October 2014, the AAR also may issue rulings
in relation to the tax liability of residents in prescribed cases. From 1 April 2015, the AAR may
issue rulings on whether an arrangement is an impermissible avoidance agreement. Rulings are
binding on the applicant and the tax authorities for the specific transaction(s).
As stated above, the taxpayer may enter into an APA with the CBDT to determine the arms length
price or the manner of determination of the arms length price.
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4.0 Withholding taxes
4.1 Dividends
India does not levy withholding tax on dividends. However, the company paying the dividends is
subject to DDT at a rate of 15% (plus a surcharge of 12% (increased from 10% as from 1 April
2015) and a cess of 3%). From 1 October 2014, DDT payable must be grossed and calculated as
15% of the aggregate dividend declared, distributed or paid, including the DDT.
4.2 Interest
Interest paid to a nonresident on a foreign currency borrowing or debt generally is subject to a 20%
withholding tax, plus the applicable surcharge and cess. Thus, the effective withholding rate is
20.6% (where total income is less than or equal to INR 10 million), 21.01% (where total income
exceeds INR 10 million but is less than 100 million) or 21.63% (where total income exceeds INR
100 million). Interest income received by a business trust from an SPV is subject to a 5%
withholding tax, plus the applicable surcharge and cess, when distributed onward to the business
trusts nonresident unitholders. Interest paid to a nonresident on specified borrowings in foreign
currency is subject to a 5% withholding tax, plus the applicable surcharge and cess, if the money is
borrowed under a loan agreement or by issue of a long-term bond, including a long-term
infrastructure bond as approved by the central government, and the funds are borrowed between 1
July 2012 and 31 July 2017. The 5% withholding tax (plus applicable surcharge and cess) also is
applicable to interest paid between 1 June 2013 and 30 June 2017 on a rupee-denominated bond
of an Indian company, or a government security subscribed for by a foreign institutional investor or
a qualified foreign investor. If the interest income derived by a nonresident does not fulfill certain
prescribed conditions for concessional withholding tax rates, a withholding tax rate of 30% (for
individuals and entities other than a foreign company) or 40% (for a foreign company), plus the
applicable surcharge and cess, will apply. The rates may be reduced under a tax treaty.
4.3 Royalties
The withholding tax on royalties and fees for technical services paid to a nonresident is 10%
(decreased from 25% as from 1 April 2015), plus the applicable surcharge and cess, unless
reduced by a treaty. Thus, the effective withholding rate is 10.3% (where total income is less than
or equal to INR 10 million), 10.506% (where total income exceeds INR 10 million but is less than
100 million) or 10.815% (where total income exceeds INR 100 million).
4.6 Other
Contractors tax
Payers must withhold tax at a rate of 40%, plus a surcharge of 2% (if payment exceeds INR 10
million) and cess of 3% from payments to nonresident contractor companies. Payers must withhold
at 30%, plus a surcharge of 2% (if the payment exceeds INR 10 million) and cess of 3% in the
case of nonresident, noncorporate contractors. An application may be submitted to the tax
authorities to benefit from a lower rate or an exemption.
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Purchase of immovable property
The transferee of any immovable property (other than agricultural land) must withhold tax at a rate
of 1%, plus the applicable surcharge and cess, on the consideration for the transfer if this
consideration is equal to or in excess of INR 5 million.
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5.0 Indirect taxes
5.1 Value added tax
All Indian states, including union territories, have moved to a VAT regimea broad-based
consumption-type destination-based VAT based on the invoice tax credit method that applies to
most types of movable goods and specified intangible goods, barring a few exempted goods that
vary from state to state. The tax paid on specified inputs procured within any state involved in the
manufacturing of goods for sale within the state or for interstate sale and the input tax on specified
goods purchased within the state by a trader (in both cases from registered dealers) are available
as VAT credits, which may be adjusted against the tax on output sales within the state or the tax
on interstate sales.
The standard VAT rate in the various states ranges from 12.5% to 15%, depending on the state,
with reduced rates of 5% and 1% in most states. The reduced rates apply to the sale of agricultural
and industrial inputs, capital goods and medicines, precious metals, etc.
Export outside India is not liable to VAT and a refund of the input tax is available for exporters.
Registration is compulsory for businesses exceeding a certain annual turnover (INR 500,000 in
most states), although certain state VAT laws also specify monetary limits of sales and/or
purchases. VAT returns and payments generally are due either monthly or quarterly, based on the
amount of the tax liability. VAT is payable by the seller; however, the seller can collect the same
from the invoice to the customer.
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5.5 Stamp duty
Stamp duty is levied on instruments recording certain transactions, at rates depending on the
nature of instrument and whether the instrument is to be stamped under the Indian Stamp Act,
1899 or under a state stamp law. Stamp duty rates for an instrument vary from state to state.
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6.0 Taxes on individuals
India Quick Tax Facts for Individuals
Income tax rates Progressive to 30%, plus surcharge of 12%
if income is above INR 10 million and cess
of 3% on tax and surcharge
AMT rate 18.5%, plus the surcharge and cess, on
adjusted total income in excess of INR 2
million
Capital gains tax rates 10%-30%, exempt in certain cases
Basis Worldwide income for resident and
ordinarily resident individuals
Double taxation relief Yes
Tax year 1 April31 March
Return due date 31 July/30 September/30 November
Withholding tax
Dividends No
Interest 10% (residents)/5%/20%/30%
(nonresidents), plus surcharge and cess
Royalties 10%, plus surcharge and cess
6.1 Residence
The extent of an individuals liability for personal income tax depends on whether the individual is
resident and ordinarily resident, resident but not ordinarily resident or nonresident in India.
For tax purposes, an individual is resident in India if he/she is physically present for at least 182
days in the country in a given year, or 60 days in a given year and 365 days or more in the
preceding four years. Individuals not satisfying the above condition will be nonresidents for that
year. For Indian citizens leaving India for employment or as members of the crew of an Indian ship
and for Indian citizens/persons of Indian origin working abroad who visit India while on vacation,
the threshold is 182 days in the relevant year instead of 60 days.
A not ordinarily resident individual is a person who either has not been a resident in nine out of
the 10 preceding years, or who has been in India for 729 days or less during the preceding seven
years. As a result, expatriate managers who have lived in India continuously for two years may be
liable to tax on their worldwide income in the third or fourth year.
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6.2 Taxable income and rates
Personal income tax is levied on only about 3.5% of Indias more than one billion citizens. The
states levy profession tax on salaried employees and persons carrying on a profession or trade at
rates that vary by state.
Taxable income
An individuals income is categorized into different heads of income:
Employment income;
Business or professional income;
Income from real estate;
Capital gains; and
Other income.
Ordinary residents of India are taxed on worldwide income. Persons not ordinarily resident
generally do not pay tax on income earned outside India unless it is derived from a
business/profession controlled in India, or the income is accrued or first received in India or is
deemed to have accrued in India (subject to certain exceptions).
Nonresidents are liable to tax on India-source income, including the following: (1) interest, royalties
and fees for technical services paid by an Indian resident subject to certain exceptions; (2) salaries
paid for services rendered in India; and (3) income that arises from a business connection or
property in India. They also are liable to tax on any income first received in India.
Expatriates
Remuneration received by foreign expatriates working in India generally is assessable under the
head salaries and is deemed to be earned in India. Income payable for a leave period that is
preceded and succeeded by services rendered in India and that forms part of the service contract
also is regarded as income earned in India. Thus, irrespective of the residence status of an
expatriate employee, the salary paid for services rendered in India is liable to tax in India.
There are no special exemptions or deductions available to foreign nationals working in India.
However, a foreign national who comes to India on short-term business visits can claim an
exemption under the domestic tax law or a relevant tax treaty. Nonresident individuals desirous of
availing treaty benefits need to obtain a tax residency certificate from the country where they are
tax residents and generally must furnish this certificate along with a new form (Form No. 10F) to
obtain treaty benefits.
Where salary is payable in foreign currency, the salary income must be converted to Indian
rupees. For this purpose, the rate of conversion to be applied is the telegraphic transfer-buying
rate as adopted by the State Bank of India on the last day of the month immediately preceding the
month in which the salary is due or paid. However, if tax is to be withheld on such an amount, the
tax withheld is calculated after converting the salary payable into Indian currency at the rate
applicable on the date tax was required to be withheld, i.e. the date of payment.
Value of benefits
The government has laid down valuation rules for determining the taxable value of the benefits
provided to an employee:
Rent-free accommodation: Specified percentage of the employees salary, depending on
the city where the accommodation is located.
Use of movable assets of employer: 10% per annum of the actual cost of the assets, or the
amount of rent paid by the employer if the assets are leased (the use of computers and
laptops is not treated as a perquisite).
Interest-free/concessional loans exceeding INR 20,000: Interest computed at the annual
rate charged by the State Bank of India.
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Other benefits: The taxable perquisites value will be computed per the prescribed valuation
rules.
Approved superannuation fund: A contribution in excess of INR 100,000 is taxable.
Medical reimbursements: Exempt up to INR 15,000 per annum.
Voluntary retirement schemes: Exempt up to INR 500,000 on satisfaction of specified
conditions.
Deductions and reliefs
Standard deductions are not allowed. Allowed deductions include contributions to life insurance;
recognized provident funds; national savings certificates; the national savings scheme;
subscriptions to certain mutual funds; deposits made under the Senior Citizen Savings Scheme
Rules (2004); five-year time deposits under the Post Office Time Deposit Rules (1981); certain
education expenses up to INR 150,000; interest on loans for higher education (self, spouse and
children), without limit; mortgage interest up to INR 200,000 annually on home loans obtained on
or after 1 April 1999, if the borrower resides in the home; and royalties received by authors of
literary, artistic and scientific books and for income from the exploitation of patents of up to INR
300,000. An additional deduction of INR 20,000 is allowed for investments in infrastructure bonds.
A deduction up to INR 15,000 is allowed for health insurance premiums. Additionally, INR 15,000
(INR 20,000 for senior citizens) is allowed for health insurance premiums paid for dependent
parents.
Rates
The personal income tax is imposed at progressive rates of up to 30% (plus surcharge of 12%
(increased from 10% as from 1 April 2015) payable if the income exceeds INR 10 million, and an
education cess of 3% that is levied on the tax and surcharge payable). A general exemption from
tax and filing obligations applies for those with an income of less than INR 250,000 (INR 300,000
for resident senior citizens). Senior citizens refer to individuals whose age is 60 years or more.
The very senior citizen category introduced in 2012 to cover individuals who are 80 years and
above continues. The basic exemption limit for this category is INR 500,000.
A tax rebate of INR 2,000 is allowed for individuals with taxable income up to INR 500,000.
The current tax brackets are: the 10% bracket (exclusive of surcharge and cess) for income from
INR 250,001 to INR 500,000; the 20% bracket (exclusive of surcharge and cess) for income from
INR 500,001 to INR 1,000,000 and the 30% bracket (exclusive of surcharge and cess) for amounts
in excess of INR 1,000,000. A surcharge of 12% on the tax is levied if income exceeds INR 10
million, subject to applicable marginal relief. In addition, a cess of 3% is levied on tax and
surcharge.
AMT is imposed on individuals, associations of persons and bodies of individuals with adjusted
total income exceeding INR 2 million. The rate is 18.5%, further increased by the applicable
surcharge and cess. Tax paid under the AMT provisions may be carried forward for set off against
income tax payable in the next 10 years, subject to certain conditions.
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6.5 Real property tax
Municipalities levy property taxes (based on assessed value) and states levy land-revenue taxes.
6.8 Compliance
All taxpayers are required to apply for a permanent account number (PAN) for purposes of
identification. The PAN must be quoted on all tax returns and correspondence with the tax
authorities and on all documents relating to certain transactions. Every recipient (whether resident
or nonresident) of India-source income subject to withholding tax must furnish a PAN to the Indian
payer before payment is made. Otherwise, tax will have to be withheld at a higher rate, as
prescribed.
Each taxpayer must file a return; the concept of joint filing does not exist in India.
Individuals must file an income tax return electronically showing their total income in the previous
year if that income exceeds INR 0.5 million.
An individual that is required to have his/her accounts audited must file a return by 30 September
immediately following the end of the fiscal year. An individual that is required to submit a transfer
pricing accountants report must file a return by 30 November immediately following the end of the
fiscal year. All other individuals must file a return by 31 July immediately following the end of the
fiscal year.
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India Taxation and Investment 2015
7.0 Labor environment
7.1 Employee rights and remuneration
Indias labor laws are complex, with more than 60 pieces of relevant legislation. Employers face
particular difficulties in terminating employment and closing an industrial establishment.
Working hours
The Factories Act, 1948 requires maximum working hours of 48 hours per week. In practice, office
employees normally work a five-day week of 40-45 hours. Factory workers have on average a six-
day week of 48 hours. Any work beyond nine hours per day or 48 hours per week requires
payment of overtime at double the normal wage.
Maternity leave of 12 weeks is provided under the Maternity Benefit Act, 1961.
The Industrial Employment (Standing Orders) Act, 1946 requires industrial establishments with 100
(number may vary by state) or more employees to establish standing orders that specify working
conditions (hours, shifts, annual leave, sick pay, termination rules, etc.). These orders must meet
minimum state standards and may be changed only with the consent of the workers or the trade
unions, and only to augment benefits.
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India Taxation and Investment 2015
8.0 Deloitte International Tax Source
The Deloitte International Tax Source (DITS) is a free online database that places up-to-date
worldwide tax rates and other crucial tax information within easy reach. DITS is accessible through
mobile devices (phones and tablets), as well as through a computer.
Connect to the source and discover:
A database that allows users to view and compare tax information for 65 jurisdictions that
includes
Corporate income tax rates;
Historical corporate rates;
Domestic withholding tax rates;
In-force and pending tax treaty withholding rates on dividends, interest and royalties;
Indirect tax rates (VAT/GST/sales tax); and
Information on holding company and transfer pricing regimes.
Guides and Highlights Deloittes Taxation and Investment Guides analyze the investment
climate, operating conditions and tax systems of most major trading jurisdictions, while the
companion Highlights series concisely summarizes the tax regimes of over 130 jurisdictions.
Jurisdiction-specific pages These pages link to relevant DITS content for a particular
jurisdiction (including domestic rates, tax treaty rates, holding company and transfer pricing
information, Taxation and Investment Guides and Highlights).
Tax publications Global tax alerts and newsletters provide regular and timely updates and
analysis on significant cross-border tax legislative, regulatory and judicial issues.
Tax resources Our suite of tax resources includes annotated, ready-to-print versions of holding
company and transfer pricing matrices; a summary of controlled foreign company regimes for the
DITS countries; an R&D incentive matrix; monthly treaty updates; and expanded coverage of
VAT/GST/sales tax rates.
Webcasts Live interactive webcasts and Dbriefs by Deloitte professionals provide valuable
insights into important tax developments affecting your business.
Recent additions and updates Links from the DITS home page to new and updated content.
DITS is free, easy to use and readily available!
http://www.dits.deloitte.com
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India Taxation and Investment 2015
9.0 Contact us
To find out how Deloitte professionals can help you in your part of the world, please visit the global
office directory at http://www2.deloitte.com/global/en/get-connected/global-office-
directory.html, or select the contact us button at http://www.deloitte.com/tax.
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India Taxation and Investment 2015
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